December 13,2007

Keep Talking

By Ma Wenluo
It appears that US Treasury Secretary Henry Paulson will have to be satisfied with a group of symbolic achievements made on food safety and energy protection issues in the forthcoming third Strategic Economic Dialogue (SEDIII) held in Beijing. It is unlikely that any strong progress will be made about China further opening its financial markets. Apart from this, it’s still important to keep the SED platform after both China and US go through their political seasons.

"Wall Street man" Paulson’s fundamental concern has been the progress China has made towards its promise to open the country’s financial markets. Half a year ago, under scrutiny of the US Congress, the Washington-held SED II reached several agreements between China and US. Regarding the opening of China’s financial sector, China agreed to remove a block on the entry of new foreign securities firms and to resume licensing securities companies, including joint-ventures, in the second half of 2007, and to raise the quota for Qualified Foreign Institutional Investors (QFII) from $10 billion to $30 billion. China also agreed to immediately allow foreign-invested banks to offer their own brand of RMB-denominated credit and debit cards. The China Insurance Regulatory Commission(CIRC) is making decisions from August 1st on applications for conversion from branch to subsidiary that have been pending for more than a year.

With half a year gone, appropriate progress has been made. Shang Fulin, president of the China Securities Regulatory Commission (CSRC), declared that the quota of QFII would be extended to $30 billion. On September 25th, CSRC approved the applications of the New York Stock Exchange LLC and the Nasdaq Stock Market, Inc., to set up representative offices in Beijing. On November13th, Qi Bin, Head of the CSRC Research Center, said the rules for applying for a joint-venture company had been rectified and would soon appear. Although he did not reveal details, it is believed that conditions for approval will be relaxed and foreign investment banks can expect a maximum stake of 49% in joint venture securities companies, moving beyond China’s promises when it joined WTO that the maximum stake foreign banks could take would not be higher than 33% after 3 years. CITIC Securities has recently publicized its proposal to swap shares with US investment heavy Bear Stearns. If approved, it will be the second time after SED for a Chinese securities company to join up with a foreign partner. JV securities companies have, since this year, began to get involved in securities brokering. Goldman Sachs Gaohua undertook the IPO of Ningbo Commercial Bank, and was a joint underwriter of China Merchants Group?enterprise bond issuance. Also in 2007, Swiss bank UBS, CITIC and China International Capital Corporation together underwrote the A-share IPO of PetroChina.

In the insurance industry, AIU Insurance Company (General Insurance Division of AIA) received a license to operate in Shanghai on October29th.   At present, among the 14 subsidiaries of foreign property insurance companies in China, 10 have been incorporated.

The issue of letting foreign bank corporations distribute bankcards is pending.  The People’s Bank of China (PBoC), China’s central bank, has asked foreign bank corporations to transfer their data centers to China to better supervise them, but this requirement has been opposed by the foreign banks. According to PBoC staff, this request by the regulator isn’t unusual. Leaving the data center abroad would worry regulators about safety issues, such as data outflow.

While China is opening its financial markets to the US, China will use SEDIII to request the US to further open its own financial sector, including investment opportunities that can be opened to China Investment Corporation. The government feels that, over the past five years, China has realized its promises to open up its services industry. More than 100 Chinese service & trade sectors have opened to foreign capital, a magnitude of openness very close to that of developed countries and in some sectors even higher.

On Nov. 8th, China Merchants Bank (CMB) gained the US Federal Reserve’s approval of its application to establish a New York branch. However, US regulators, including the Fed, posed several conditions on combined financial statements, capital adequacy rate, bad debt ratio, information revelation and anti-money laundering. For example, if a bank wants to conduct deposit business it has to join Federal Reserve System and needs to be a US incorporated bank before joining this system. It will be long before CMB will be able to conduct general business in the American market, though it must be said that the Chinese government also requires foreign banks to be incorporated in China if they want to develop RMB business.

The forthcoming dialogue will prove how valuable SED has been to US-China relations. China hopes SED can be a stabilizing platform between the two countries. But the US wants to permanently influence the direction and destination of Chinese economic development through the progress that SED makes. China has sufficient patience but Paulson, whom some Washington critics say is addicted to China issues, is under pressure from both Wall Street and Congress and will not be satisfied with merely arguing with China.

Paulson emphasizes the need for making signpost achievements. As it is understood conventionally, "signpost" achievements would indicate the making of "substantial progress" in the resolution of recently-argued issues. Paulson says the SED is long-term and strategic, but tangible progress in the form of signposts and benchmarks is critically important in demonstrating that progress is being made in achieving long-term objectives. The Chinese have always seen that these signpost achievements as costing more and more.

Members of the US Congress have demanded that the US government needs to take tougher measures urging China to give up its unfair trade behavior, such as the "manipulation of its exchange rate". Paulson says that China has taken some measures and it is obvious they can do more.

But for this dialogue, energy and environmental problem will become the main themes. In SEDII, the US and China reached agreement that they will develop up to 15 large-scale coal mine methane capture and utilization projects in China over the next five years and will cooperate in developing clean coal technologies.

Analysts in both nations expect a lot from cooperation in energy and environmental areas.  For example, both countries are enormous energy-consumers and CO2 emitters, and the potential for cooperation is huge. In reality, though, both have disagreements on any number of issues. China hopes developed countries, like the US, will reduce the prices of reproducible energy technology, assisting poor countries to mitigate their reliance on fossil fuel. But American companies are not willing to reduce their prices, and are concerned that once those new technologies were in place Chinese firms would steal them. China’s suggestion is to take care of the common interest and to balance the protection of intellectual rights with that of the global climate. In the recent Bali climate change meeting, both nations held to their own views.

To smooth the road for SEDIII, China has agreed to cancel a group of export subsidies. US trade representative Susan Schwab pointed out in a November 29th statement that the export subsidy issue shows that US and China can solve the disputes through win-win cooperation. Analysts believe that cancellation of the export subsidies will also end a WTO appeal by the US concerning those subsidies. But China has expressed its concern about the ever-increasing protectionist voice in Washington. Regarding the over 50 China-related trade bills facing the US Congress, Xie Xuren, Minister of Finance, has said that passage of those bills would deeply harm China-US trade cooperation and will finally hurt American’s own interests.

In previous weeks, both Europe and Japan have spoken up in Beijing-held their version of SEDs about the RMB issue, urging China to relax its currency controls. Washington welcomes this change of attitude towards the issue and thinks that together they can persuade China to open its domestic market, allowing an accelerated appreciation of RMB. It is expected that Paulson will press this but will not pose any substantial demands, as he knows that China has realized that RMB undervaluation harms the economy. Accelerated RMB appreciation is widely expected by market participants.

On this trip to Beijing, Paulson missed his old counterpart Jin Renqing, who has been replaced, and this will also be his last chance to meet with Chinese Vice-Prime Minister Wu Yi. China has seen Paulson as a transitory leader, and Beijing will need to wait until after next year’s American election for a longer-term policy maker. To Paulson, the most important thing is that SED remains after he leaves.


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